There was an article in Wall Street Journal online edition this weekend about a tentative deal on new financing deal for Greece. On the surface Euro-zone governments are still pursuing a hopeless strategy of "kicking the can down the road". I am sure by now more and more politicians realize the situation is dire and the austerity measures will not prevent the inevitable - either debt restructuring on an outright default. What is interesting now is that private lenders (banks, pension funds, investment companies etc.) are asking to participate in the bailout to the tune of €30 billion. Last time German Chancellor Angela Merkel pushed for private sector to take a haircut on Greece debt, the markets became worried. At that time bending the pressure from France, Germany backed off and supported 100% government sponsored bailout - markets, of course, happily recovered.
It appears that we may see a spike in volatility next week as the markets absorbs the proposal of the private participation of the bailout. I am sure there is a significant behind the scenes push back on the proposal happening this weekend, and will be interesting to see if Germany backs off this time. In my opinion it should not, and private sector should start paying for the mistakes of mis-pricing the risk of Greek investments.
The highlights of the tentative deal are below:
- Soon-to-mature debt to be exchanged for debt of long maturity. This way, Greece can avoid going into capital markets. It appears it is done to prevent the price discovery on the new debt issuance as the new yields may and probably will spook the markets. 10 year Greek debt is currently yielding 15% and two year is yielding 20% on the open market.
- New lending will be provided (as in the past, the problems are "cured" with more debt) by the Financial Stability Facility, which will come with the condition that private financial institutions exchange their debt for longer maturity.
- Greece is pass new budget cuts and purse a sale of €50 billion in assets. I would expect riots and the streets again. Also considering that Greece is marching into long-term stagnation or even recession, who will step in to buy the assets?
- European Central Bank is expected to help with the debt swap described above by refusing to accept old bonds as a collateral, but only accepting new ones. ECB for now is trying to show that it is an independent institution and is officially resisting, but I wonder for how long.